IRS Penalty Handbook: information return penalties.

• Position: Tax Executive Institute IRS Administrative Affairs Committee and Payroll and Other Taxes Subcommittee

On March 10, 1994, Tax Executives Institute submitted the following comments to the Internal Revenue Service on the portions of the IRS's draft penalty handbook relating to information reporting penalties. The comments took the form of a letter from TEl President Ralph Welland to Joan R. Dolian, the IRS's Director, Penalty Administration. They were prepared under the aegis of the Institute's IRS Administrative Affairs Committee, whose chair is Robert D. Adams

of Halliburton Company, and its Payroll and Other Taxes Subcommittee, whose chair is Clifford H. Omo of Mobil Administrative Services Company, Inc. Michael J. Nesbitt of Paychex, Inc., Nathan Rosen of MCI Communications Corporate, and Joseph A. Cottonaro of Hershey Foods Corporation contributed materially to the preparation of the comments.

In response to the IRS's request, Tax Executives Institute is pleased to provide the following comments on the draft of Chapter 10, Information Return Penalties, of the IRS Penalty Handbook.

General Comments

As noted in our comments on the draft of Chapter 11 of the IRS Penalty Handbook, TEI believes that the draft Handbook represents a good effort at outlining the applicable penalties. We suggest, however, that the IRS include more examples relating to situations where penalties should not be asserted (for example, with respect to inconsequential omissions) and the application of the reasonable cause exception. We believe that such an approach will provide more guidance to agents and will help ensure that penalties are asserted only where there is taxpayer misconduct.(1)

Sections (20)(10)12.23 and (20)(10)33: Intentional Disregard of the Rules and Regulations

1. Section 6723 Penalty. Section (20)(10)12.23 of the draft provides that the intentional disregard of the rules and regulations penalty applies when the facts and circumstances show that the filer knowingly or willfully failed to comply with the requirements of sections 6721 (failure to file correct information returns), 6722 (failure to furnish correct payee statement), or 6723 (failure to comply with other informationreporting requirements) of the Code. Subsection (3) states that there is no dollar limitation for the intentional disregard of the rules and regulations penalty.

   The draft Handbook is correct that under sections 6721 and 6722, an additional penalty is provided with no maximum limitation for the intentional disregard of rules and regulations. It is incorrect, however, with respect to the section 6723 penalty. That penalty provides a maximum penalty of $100,000 for the failure to comply with a specified informationreporting requirement; there is no specific provision, however, for the intentional disregard of rules and regulations. We recommend, therefore, that the reference to section 6723 be deleted. (The reference to the intentional disregard of rules and regulation penalty should also be deleted from section (20)(10)51(5).

2. Facts-and-Circumstances Test. Section (20)(10)12.23(1) provides that one of the factors to be taken into account in determining knowledge or willfulness is whether the filer made the same failure in prior years.

   Many fliers--particularly small businesses and businesses operated by individuals for whom English is not a first language--may not be fully aware of all filing requirements. While ignorance of a filing requirement should generally not, by itself, be deemed sufficient to establish reasonable cause, a pattern of failure among these filers may not constitute willfulness. For purposes of the more substantial penalty for intentional disregard of the rules and regulations, we suggest that such filets be given the benefit of the doubt. The Handbook should clearly state that the filer should reasonably have been expected to be aware of the requirements before the penalty is imposed. TEl therefore recommends clarifying subsection (a), as follows:

   (a) Did the person make the same failure in prior years where the person could

   have been reasonably expected to be aware of the filing requirements? Pattern of

   conduct-repeated offense."

3. Cost of Compliance. We must confess some puzzlement over the statement in section (20)(10)33(3) of the Handbook that "when determining if the flier knowingly or willfully failed to timely file or failed to include correct information, determine if the penalty is less than the cost of complying with the information reporting requirements." What is the effect (if any) of a determination that the amount of the penalty is lower than the cost of compliance? If the cost of compliance is higher (or lower), is the penalty not to be asserted in such circumstances? Is the relief provision available only for minor offenses? If so, the cost of compliance should also be taken into account when assessing the other informationreporting penalties." In any event, the section should be clarified.

   Section (20)(10)(10)2: Reasonable Cause

1. Existence of Reasonable Cause. Section (20)(10)(10)2 of the draft sets forth the circumstances under which the IRS can waive an information-reporting penalty because the filer has established reasonable cause. Subsection (9) provides that reasonable cause exists where

   * the filer acted in a responsible manner, both before and after the failure occurred;

   * there are significant mitigating...